On October 9, the lives and businesses of many in Sonoma, Napa and Mendocino Counties were changed forever. Homes and businesses burned. Others who didn’t lose their homes were displaced for many days and returned to changed neighborhoods and smoke damage beyond belief. Businesses may have lost employees due to displacement and a lack of affordable housing. We are only now beginning to understand the full ramifications of what happened over the days the fires did their damage to our home.
The Federal and State governments have stepped in, from Cal Fire, the California National Guard and many local fire and police departments stepping up to assist with the fire fighting and security needs, to FEMA assistance, and President Trump declaring the fire damaged counties as federally declared disaster areas.
What does this mean to us? With FEMA assistance and the Federal Disaster Area declaration, the federal government has stepped in with direct assistance, special Small Business Administration loan programs and enhanced tax benefits for the disaster losses. The state has mobilized for security and clean up assistance, and has enlisted the help of many organizations, including the Red Cross, Salvation Army, local Food Banks and other entities providing food, clothing and housing assistance.
Beyond the immediate needs of finding long term shelter until the burned homes can be replaced, acquiring adequate clothing and other items necessary to carrying forward with life, there are many difficult and confounding dilemmas which will be faced by those with significant fire losses.
Federal Disaster Area Declaration
If your home simply burns down, there are several provisions of the tax code which give preferential tax treatment to those who have lost their home and possessions. In general, personal assets lost to a fire are treated as “Involuntary Conversions” and also referred to as “Casualty and Theft Losses”. There is a specific form that the IRS provides to report these losses, form 4684. To the extent that you have a significant unreimbursed loss due to a catastrophe (fire, hurricane, flood, tornado, earthquake) or theft (Significant = greater than 10% of your Adjusted Gross Income) a loss of personal assets may be deducted from your taxable income as an itemized deduction (Schedule A of form 1040). For reimbursed losses (recovery generally from an insurance policy), you have two years from the end of the year that the event took place to use the reimbursement to acquire property “of like kind.” So, if your home that you bought for $500k and had insured for $800k burns down when it was worth $900k (including land) and you use the $800k to rebuild the home (home only, no contents) before the end of 2+ years from the date of the fire, the insurance rebuild will not result in any taxable income to you. Of course, that assumes that no part of your home was used for business purposes.
For the covered personal property inside, non-business personal property is treated in lump sum and as long as the insurance proceeds are spent on “similar property” there will also not be any taxable gain realized from the reimbursement.
If the insurance proceeds exceed the qualified replacement costs of the items lost, there can be taxable income. For example if you had $400,000 of personal property in the house, insured at $400,000, which you bought throughout the years for $350,000, got $400,000 in payment from the insurance company, and spent $300,000 buying replacement items, pocketing $100,000, you would have a gain to report of $50,000. $400,000 reimbursement less $350,000 cost of items lost. You would not have a casualty loss on this with these facts. In the same example, if you spent $375,000 on replacement items, the reportable gain would only be $25,000.
For business property losses, the calculations are different. Each business asset lost is treated differently, with the insurance proceeds treated as potential sale price and the requirement to replace with like kind examined asset by asset. For example, if you lost a copy machine and decide to replace it with a really nifty espresso maker, the insurance proceeds for the loss of the copier will be treated as a sale of the copier, which may result in a taxable gain, and the espresso machine purchase would be treated as a new asset addition. Gains determined on a business form 4684 are reported on form 4797.
Federal Disaster Area declarations provide additional timing benefits to those who have experienced losses. In general, the loss replacement period is 2 years. This might be sufficient if yours were the only home or business destroyed in the fire, but with well over 7000 homes and other structures damaged or destroyed, the prospect of getting everything replaced in two years would be impossible. When in a federally declared disaster area, the two year replacement period is increased to three years for losses of business assets, and four years for losses of personal assets. In our case, it is entirely foreseeable that even four years may not be enough to replace all that was lost. There is a provision to request an additional extension of time to replace property lost in a federally declared disaster area due to extenuating circumstances.
Cal Recycle Assistance
The quasi-governmental agency California Recycle has offered to perform site cleanup and remediation. It is unclear whether this makes sense in all cases. It is offered for “free” to all who lost their homes in the fire. They claim that, along with other agencies, they will handle the toxic waste removal and remediation of the site with no out of pocket cost to the homeowner. The devil is in the details however, and you should examine the offer thoroughly before agreeing to allow those agencies to do any such work on your property. It is not necessarily “free” because their agreement requires that if there are insurance or other funds available to clean up the site available to you, you must turn them over to Cal Recycle. Also, they do not take any responsibility for any problems which might result from their work and they do not certify the cleanup. Still, it may not be a bad choice given all the options available.
Please remember that even though your house or business location no longer exists, your responsibility does not end. You are generally responsible for the cleanup of the site, as well as erosion control. We understand that parts of Cal Recycles procedures are to remove the foundations and scrape the lot to remove any surface pollutants resulting from the disaster. If your site is on a hillside in Fountaingrove, that may not be such a good idea. The existing foundation and the root structure of the lawn and plants around the house will provide some erosion protection. It may make sense to initially remove the loose debris and ash from the property and wait until after the rainy season is over to finish site remediation if necessary. Otherwise, you may also incur significant costs for erosion control.
Insurance coverage can be a complete nightmare for the unaware. The definitions of coverage, limits of coverage, carve outs and special limitations along with special riders and the like make this very important asset unapproachable at the very least. Your insurance agent can be a resource, but remember that he or she has many clients with losses at this point and they are generally not in the chain of command for claims. They should be used in the event that there is confusion or disappointment in the way you are treated. It is generally not a good use of time or resources to address specific questions about your loss or your coverage with your agent unless you are not getting satisfaction with the claims representative assigned to your losses. You may have several different claims representatives assigned to you. For example, there will be a representative assigned to the structure itself, another for the contents, another for the loss of use, and possibly one each for each vehicle lost. These should all be specialists in that area who are trained to specifically address your claim on that specific piece of your total losses, and they are generally not in communication with each other.
Some important information for you to know:
1. If your car burned in the fire, even if it was in your garage at the time, is covered by the comprehensive loss policy rider in your auto insurance. If you lost a car which was in the garage that was not covered by insurance, you may be entitled to reimbursement under the personal property section of your coverage, but that may be specifically limited or excluded. For example, if you were working on a collector car in the garage which was not yet rolling and so was not insured, you may be limited under the collectibles limitation of your policy.
2. Coverage for personal property usually has specific limitations for certain classes of items, for example, Jewelry and Collectibles. For coverage of items in the Jewelry or Collectibles categories, you may have needed a special rider for specific items for full coverage.
3. In general, you will be working from “replacement cost”. There is an offset called “depreciation”. If you have replacement cost insurance, and you actually replace the item, be it the structure or personal property within the structure, your cost to replace will generally be covered.
4. You generally cannot get reimbursed for “betterment”, for example, if the countertop which burned was tile and you replace it with granite, you will be responsible for the upgrade cost. The insurance will generally allow in replacement the full cost (from their numbers) for like kind replacement. You may need to work with them to understand the real cost to replace what was there before. You may be able to get assistance from the contractor who is doing the work. For example, if you can get them to bid the work as it was and show the upgrade costs separately, insurance will cover the cost before the upgrades.
5. For many of you, it has been a long time since the structure which burned was built. Since then, it is likely that certain building codes have changed and your rebuild will need to incorporate the new requirements. Many insurance policies contain a rider which covers code upgrades, but this is generally limited as well. It is likely that your code upgrade rider will be a percentage of the base structure insurance on the dwelling, for example, 10%. So, if your insurance on the structure is stated at $600,000, if there are code upgrades required which add as much as $60,000, in this case, to the cost of reconstruction, you would be covered. Code upgrade costs are not part of the general insurance on the dwelling, and this can get confusing. For example, in this case if the rebuild cost was $660,000, but only $40,000 of the cost of rebuilding was for code upgrades, insurance is likely to only reimburse $640,000. You may also have a guaranteed replacement cost rider which would add a percentage of the base insurance in the case of unanticipated increases in the cost of rebuilding. Given what is happening in the marketplace right now, it appears a guaranteed replacement cost rider would have been a good choice, however, with a general limitation of 10%, it still may not have been enough to fully cover the replacement of your dwelling. Your contractor should be fully aware of the limitations on your policy, since the charges for what is being done are in his control.
6. If you choose not to replace the dwelling and instead take the insurance, pay off the loan, sell the lot and move elsewhere, there is a different formula for reimbursement. You still start with the replacement cost of the dwelling, limited by only the policy limit, and no code upgrade rider, since the insurance company is not paying to rebuild, they are paying for what you had. By the way, in that case, some of what you had was old and worn, not brand new, so there is a concept of “depreciation” For example, your home had systems like a water heater, a furnace, and air conditioner, a dishwasher, ovens, a range, a microwave, etc. Those are likely to not have been brand new when they burned, so they were no longer worth what a brand new item would cost. The insurance companies have programs depending on the item which gives it a percentage depreciation based on its age, which is subtracted from the replacement cost. The initial assumption is that everything in the structure is original. It is important, in securing the highest reimbursement for your loss to identify items which were replaced more recently and obtain proof so that if, for example, you replaced the furnace and air conditioner two years ago, and upgraded them from the original item, be sure that they are only depreciating two years of the total life and that they are working back from the proper component, and not a cheaper, less capable component. If you remodeled a bathroom last year, be sure to note that and get some proof of the work.
7. Your records probably burned in the fire, but all is not lost! You may be able to re-create some or all of your necessary records. Your credit card companies can supply you with several years of monthly statements from which you can identify the cost of items which were burned in the fire. Contractors you used for work done can supply you with copies of their invoices to you documenting the work done and its components. You may have had art or collectibles you bought at a gallery, or jewelry from a jewelry store. These businesses keep their records for quite a long time and you may be able to get copies of your purchases from them. They may also be able to help you determine what the replacement value of items you purchased from them would be, especially in the hope that you might actually buy the replacement from them. You may have helpful pictures stored on your smartphone or the smartphones of friends and relatives. You may have backed photos up to the cloud. Be creative in determining where you might obtain corroborating evidence that you had something.
8. For personal property reimbursement and or replacement, you will need to create an inventory sheet. You may have been one of those odd people who keep track of everything and may have even stored that information somewhere safe, but for many of us, we will have to rely much on memory to list what was lost. If you were not one of the list-makers who were incredibly prepared, here are a few hints as to how to list the items lost most completely:
a. Go room by room. Perhaps you will have pictures you can work from. Analyze the room thoroughly, by sections. List everything in the room not bolted to the walls, the floor or the ceiling. Mentally open drawers. Don’t forget to list things like table linens and baskets. Be sure to identify the maker and model of furniture if you can.
b. Ask for help from close friends or relatives who might remember things you don’t. Go through the list room by room with them and talk about the items in the room.
c. Don’t forget your holiday decorations.
d. Don’t forget the kitchen appliances. Again, make and model are very important. Pictures can be very helpful with this. Vendors may be able to help you with identifying the actual item from a picture, as well as the replacement cost.
e. Don’t forget grandma’s silver and crystal stored in the back of a cabinet.
f. Collectibles are hard. The more documentation, the better, but be sure you know the limits on your policy before you spend too much time on this. If your policy limit is $10000, and you list $25,000, you will still only get $10,000, even if you replace the whole list. If you find the bases of the pieces, you may be able to photograph the maker of the item, and it may have the piece’s name.
g. Don’t forget the food in the cupboards, the freezer and the refrigerator! Those burned up too!
h. Barware and bar inventory is often overlooked. Didn’t you just by a case of Remy-Martin?
i. Wine inventory? Not a collectible, but depending on the item, they might assert that it is.
9. Personal property is everything that is not permanently attached to the structure. For example, a countertop microwave is personal property, a built in microwave is part of the structure. Your refrigerator, washer and dryer are personal property. Don’t forget the appliances in the garage!
10. Tools! Dad spent a lot of money through the years buying tools. Remember, Craftsman has a lifetime warranty. If you take the damaged Craftsman tools back to Sears, they are supposed to replace them.
11. Maybe now is the time to try out the lifetime warranty on that Cutco knife set! A thing to remember is that if the manufacturer will replace items that burned, you don’t have to make a claim for them under your insurance policy, leaving more to cover items which were not otherwise covered.
12. Explore refunds for unused portions of appliance warranties. I have already heard of refunds being given.
13. Report the destruction and title transfer on any destroyed vehicles to the DMV asap. They are supposed to be reported within 5 business days of the title transfer to the insurance company.
14. Stop any deliveries to your burned address.